Indonesia's state-owned oil company, Pertamina, welcomed a new chief executive, Nicke Widyawati, in August. Ms Widyawati takes over at a time when Pertamina faces significant headwinds, not least due to turbulent conditions in the global economy. The immediate predicament faced by the company's executives and policymakers lies in the decision in 2017 by the president, Joko Widodo (known as Jokowi), to freeze the price per litre of domestic fuel for 2018‑19, despite higher global oil prices.

As domestic demand for oil rises, Indonesia faces dwindling local production from its ageing oilfields, higher international prices and a weaker currency. As an example, the 2016 government budget contained a target of lifting oil production to 820,000 barrels/day (b/d) at an assumed price of US$40 per barrel; in 2019 the target is just 750,000 b/d, but the price assumption has increased to US$70/b. In order to meet accelerating domestic demand, Pertamina imports up to 500,000 b/d of crude oil and a further 1.1m b/d in refined fuels. In addition to higher global prices, the rupiah depreciated against the US dollar by around 5.4% year on year on average in January‑September 2018, further crimping Indonesia's purchasing power in international oil markets.

Not all that gloomy

Higher global oil prices aid Pertamina's upstream operations by boosting the revenue it receives from sales of crude oil, but this is offset by losses downstream from selling subsidised refined fuels. The 2019 budget includes planned spending of Rp156.5trn (US$10.8bn) on fuel subsidies, representing an increase of 60% on earmarked expenditure in the 2018 budget. However, the gross margin to sell refined fuels is accounted for on Pertamina's balance sheet, rather than the state budget. In 2017 Pertamina's revenue rose by 17.7% to US$43bn, owing to higher crude sales in value terms, but net profit fell to US$2.4bn (down by 22% from the previous year) because of subsidised refined fuels.

Three-pronged approach

Ms Widyawati has outlined three early priorities for Pertamina to allay its financial difficulties: reducing imports of crude and refined fuel, accelerating refinery construction and boosting biofuels exports. On balance, it is too early to determine the extent to which the new chief executive will limit imports in the second half of 2018. Indonesia hosted the Asian Games between late August and early September, and energy imports increased to meet the spike in demand. In September Pertamina imported around 1.1m b/d of petroleum, down slightly from the total imported in August.

Beyond the immediate term, however, Indonesia will lower its reliance on imported crude only by arresting the decline its oil lifting performance. This decline has been enabled by the central government, which has sought to increase state ownership of strategic commodity extraction concessions, but has encountered difficulties in ensuring the necessary capital investment to boost production at ageing oilfields. Similarly, Indonesia's dependence on regional refinery hubs can be reduced only by boosting domestic capacity. Construction on a refinery in Balikpapan would expand capacity by 50% to around 360,000 b/d (Ms Widyawati says that jump-starting this project is a top priority).

Three other facilities in Central Java, East Java and East Kalimantan provinces involve tie-ups with a Japanese-Omani consortium, Saudi Aramco and Russia's Rosneft. Tellingly, the last refinery constructed in Indonesia opened in 1994. Refineries tendered under public-private partnership programmes have stalled owing to various financing and procedural issues. Ms Widyawati has said that she will "not wait" for these partners to pursue construction because of the extent of the delays, but it is unclear where the alternative capital spending will come from to begin construction. In June the minister for state-owned enterprises, Rini Soemarno, authorised Pertamina to begin implementing a planned divestment programme, which would include offloading some upstream assets.

Loss-making to continue

Pertamina's difficulties reflect the wider puzzle facing Indonesia's policymakers. More expensive oil imports are swelling Indonesia's current-account deficit. This has forced down the value of the rupiah, further pushing up the value of oil imports. Jokowi won praise in the early years of his current term for eliminating almost US$20bn from the country's fuel subsidy bill and increasing the infrastructure budget by 50%. However, with an election approaching in April 2019 and the rupiah touching a two-decade low, Jokowi elected to freeze fuel prices in order to restrict imported inflation. Indonesia recently recorded a relative poverty rate below 10% for the first time in its history, but tens of millions remain at risk of re-entering poverty as food prices rise on the back of higher oil costs and other sources of imported inflation. Much of the burden of this policy falls on Pertamina, which will continue to sell refined fuels at a loss throughout 2019.